Fortescue hell-bent on expansion

Fortescue Metals Group
will divest non-core assets, pre-sell iron ore to customers, defer non-essential spending and raise further debt if necessary to avoid an equity raising to fund its $US9 billion expansion.

Chief executive Nev Power said he was confident the miner could complete its expansion program despite the plunge in the iron ore price to $US90.30 a tonne, which has put severe pressure on its margins.

“We are obviously very conscious and watchful of what is happening with the iron ore price," he told The Australian Financial Review in Sydney yesterday. “We have put in place an extra $US1.5 billion of debt funding since June. That gives us a really good, solid buffer.

“So the additional funding that we need we had planned to come from cash flows, but we’ll continue to monitor that to see where that goes and change our strategy accordingly."

Mr Power told the Sydney Mining Club that Fortescue needed $US1.5 billion of cash flows from operations to cover a remaining $US600 million funding gap plus interest and tax payments this year. Fotescue last year reported $US2.8 billion of cash from operations, but that was with an average received iron ore price of $US131 a tonne.

Mr Power said Fortescue on average receives 88 per cent of the Platts 62 per cent index price of iron ore, which is now $US92.50 a tonne due to a discount for the grade and moisture content. The miner also has freight costs of $US11 to $US12 a tonne – above the spot price of $US7 a tonne – due to older contracts.

The Financial Review’s calculations based on those factors, royalty payments, production costs, operating leases and the fall in the iron ore price mean its current cash margins could be less than $US20 a tonne. That excludes interest payments and depreciation, along with sustaining capital.

One analyst said it was possible Fortescue was temporarily close to loss-making on a bottom-line basis based on the current iron ore prices and the high Australian dollar.

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“$US90 a tonne is not a great number for us for the long term," Mr Power said of the iron ore price. “But if it were to stay at $US90 a tonne we do have a lot of things that we can do to change in our cost structure that would drive margin back into the business."

He said if the slowdown was short and sharp, as expected, Fortescue would not change its operations much. But if the slump became prolonged, it would consider cutting back on pre-stripping, running down stockpiles, changing blending practices and other moves to conserve cash. The sale of non-core assets could include its power plants, worker accommodation and a stake in the Northstar magnetite project.

Mr Power said that although Fortescue had approval to build a fifth berth at Port Hedland – estimated to cost $US250 million – it now did not expect to do so for another 18 months.

Fortescue shares fell 6¢ to $3.59 yesterday. On Tuesday and Wednesday, chairman
Andrew Forrest
waded into the market to purchase a total of 10 million shares for $38.5 million. That is just shy of the $40 million he will receive from Fortescue’s final dividend.